Affordable housing discussion on an opportunity for private investment in Prague (updated)

On December 9, the Amcham held a discussion on affordable housing, featuring Prague City Hall Council member and Deputy Mayor for Prague 7 (Praha Sobě) Lenka Burgerová, IPR SDM Section Director Jaromír Hainc, co-Executive Director of The John Marshall Law School Fair Housing Legal Support Center and Fair Housing Legal Clinic professor Michael Seng and Head of Housing Policy Department at the Ministry of Regional Development Marie Mohylová, Deputy Minister for Coordination of EU funds and international relations Section Daniela Grabmüllerová, PasserInvest Business Development Director Eduard Forejt, and Senior Associate at Squire Patton Boggs Lenka Nová.

We discussed how the public administration on both national and regional levels plans to deal with a lack of housing in Prague and rapidly growing prices.

“The government’s pro-active approach towards the reform of the construction law is definitely welcome. On the other hand, considering the current draft of the new building act," says Lenka Nová, who is leading the task force on this issue for the Real Estate Council, "it is likely that the reform will in fact cause, at least temporarily, further slowing down of the permitting processes, as well as increase of uncertainty for developers – exactly the opposite of what is the main goal of the reform. The government should reflect this and take measures necessary to minimize these effects.”

In terms of social contribution and for the social policy purposes, the Ministry of Regional Development set the limit for affordable housing eligibility at 40% of the net income based on median salary for reasonable rent which is, however, not regulated in legislative. In terms of the (social) housing allowance, based on the Act 117/1995 Sb. Zákon o státní sociální podpoře, the housing costs of the family cannot exceed 30 – 35% (the latter in Prague) of the net income. The Czech Republic, unlike the US, thus lacks the exact definition of affordable housing stated in the legislation for (middle-class) citizens who do not comply conditions for social need of housing, however, spend more than 40% of their income on living.

The Ministry of Regional Development promised to submit the new law on affordable housing in 2019, however, due to “lack of ´white spots´, the ´problems´ not regulated by the law which need to be ´generated´ first,” as claimed by the Minister Dostalova, the proposal has been postponed to the end of 2020. The new law promised to deal with the access of middle class to the affordable housing.

According to experts on social issues, the lack of housing in the Czech Republic cannot be resolved without a law. “This is a race against time. Property rents and prices are getting higher. It must be resolved. Any billion-crown subsidy program will not solve the issue. It is a good step in the right direction, but it is just a drop in the sea,” said the Ministry of Labour Malacova in October 2019.

In terms of target group for affordable housing support, the state runs different programmes for subsidies or offering loans with particular conditions. However, its programmes are more focused on socially disadvantaged citizens than all groups who need affordable housing. It has been also argued during a discussion that current state of subsidies is set for helping those who buy the apartments for investment, not their own living.

One group that should belong to “affordable housing target group” are public officials and state employees (such as teachers, state police officers etc.) whose salary is set by the law, however, their cost of living in Prague compared to other cities is much higher. Their salaries in Prague are not competitive which has been affecting their availability to find apartments on the market.

The ministry claimed that, on average, the housing situation is not that bad in the whole Czech Republic, however, Prague and other big cities (as Brno, Plzen) needs to be paid more attention. “Affordable housing is different story in the Czech Republic and different story in Prague,” said Deputy Minister for Coordination of EU funds and international relations Section Daniela Grabmüllerová.

Prioritization, one of implemented solutions in 1990s, has made the current situation more difficult as most of the housing stock has been prioritized and thus now the state and the cities lack apartments to be rented as affordable housing. The public officials at a debate noted that the prioritization policy should have set conditions to prohibit from reselling the apartment or the obligation to sell it back to the state, which would have improved the current housing situation.

The Amcham members also stressed the issue of small apartments (not only in Prague) getting more and more expensive, as people seem not to be able to afford bigger apartments. It has been argued that the capacity of Prague is limited, and all stakeholders should make sure Prague is not to become the city of small apartments occupied by young single people and senior single people (if those can afford it), pushing families out of the city. This brought a thought to a discussion, that in past 70sqm flat was enough for a family, and thus we cannot definitely base a definition of affordable housing on sqm.

In terms of property tax which goes straight to the city budget, unlike transfer tax which is collected by the state, it has been agreed it is too low in the Czech Republic. Even if Prague is compared to other much poorer cities, the capital´s property tax is much lower. Raising property tax, nevertheless, is not politically attractive and it is very sensitive topic, the representatives of the Ministry of Regional Development stressed. Moreover, it is the Ministry of Finance who decides on tax policy.

The question is then whether this should be changed and there should be founded a fund to finance affordable housing ran by the city/municipalities which would be supported by higher property taxes or transfer taxes (which could be transferred to the city level).

An example from abroad, where in some cities people pay lower property tax for apartment where they live and higher for any additional investment property, has been showed.

When discussing developers´ stance on housing policy, they claimed it is important to have the same goal on all levels and in all sectors, which is a functional market, reasonable legislation (incl. easy permitting process), enough labour capacity and better immigration policy, enough sources to build affordable housing.

The public officials also added there is the lack of trust between private and public sectors which sometimes is hindering mutual cooperation.

The ministry noted it has been working on the new Building Code which is a revolutionary change, according to them, as the main goal is to speed up the whole construction process. The ministry also stressed that affordable housing is of its highest priority, however, the main task is with municipalities to support housing construction.

One of the solutions might be cooperatives who can apply for certain support for 100% of cost, excluding the land. Cooperatives are claimed not to affect the developers´ business as if they did, then the market would not be healthy.

In order to improve the situation, the municipality/the city district should make the ways and conditions for building process better, including appropriate permitting process. According to the ministry, the state should make sure the public interest within affordable housing policy is identified. It plans to launch incentives to support affordable housing construction. The IPR´s main task in affordable housing policy should be a search for available spots for construction, including suitable infrastructure, cooperation with the city of Prague and putting the remarks and improvements for the current Building Code draft on paper. It also should help the developers to speed up the construction process.